As the UK voted to exit the EU, global markets on Friday descended into chaos, but Taiwan should come through this Brexit-fueled market turmoil with only a few scratches in the short term, as the nation’s direct export exposure to the UK is relatively small and local financial institutions’ exposure to British assets appears manageable.
Based on statistics compiled by the Ministry of Finance, bilateral trade between Taiwan and the UK was US$5.58 billion last year, accounting for 1.1 percent of Taiwan’s total foreign trade. Exports to the UK totaled US$3.78 billion last year, constituting just 1.35 percent of total overseas shipments and making Britain the 13th-largest buyer of Taiwanese goods.
The financial sector’s overall exposure to the UK market was NT$1.1 trillion (US$34 billion) as of the end of April, including about NT$784.33 billion exposure held by local insurance firms and NT$145.5 billion extended by banks, according to Financial Supervisory Commission data.
While the combined exposure of domestic banks to the UK was the sixth-highest to any nation in the world, the central bank said the tumbling British pound would have a limited effect on Taiwan’s foreign-exchange market, as pound trading makes up just 3.4 percent of the nation’s total forex trading and the British currency accounts for just 0.6 percent of local lenders’ foreign-currency deposits.
Even though the Brexit’s direct impact on Taiwan seems rather mild, the indirect and long-term effects on foreign trade and financial markets are likely to build gradually, given that the outcome of the British referendum means an uncertain period and Brexit could start to weigh on the world economy and therefore Taiwan’s trade performance.
As the UK has to negotiate and conclude an agreement with the EU within two years and receive parliamentary approval to officially withdraw from the economic bloc, the scale of uncertainty is hard to judge depending on how smoothly the exit process is carried out.
Moreover, if other nations also demand referendums on whether to leave the EU, the financial turbulence in international markets might continue, and an extend period of volatility in foreign-exchange markets offers no blessing to the global village.
Taiwan might have started to show signs of an economic recovery after the latest data indicated industrial production expanded 1.89 percent year-on-year last month, ending 12 months of annual decline. The encouraging data came on the heels of improving trade, manufacturing activity and inflation readings released earlier this month, but the fallout from Brexit might stall this nascent recovery and reduce the odds of growing the economy by more than 1 percent this year.
The central bank is to hold its quarterly meeting on Thursday, with another cut in its key interest rates to help boost exports and consumer spending already a market consensus. The question is whether the bank would maintain the scale of the rate cut at 12.5 basis points or more amid growing uncertainty, even though the real effect of lower rates might placate market expectations rather than improve the credit squeeze some companies face.
What Taiwan can learn from the Brexit is not to expect a quick pickup in external demand any time soon. Instead, the road toward sustainable growth could depend on policymakers pushing ahead with structural reforms and improvements to resilience amid global risks.
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